US Credit Worthiness, Tax Hikes and the Balancing of the Federal Budget

Krishna Tummala, director of Kansas State’s public administration program and professor of political science simply explains the reason for the nation’s burgeoning debt:

People demand more services but are not always willing to pay taxes. The politicians promise more services without telling them the cost and that they must be paid for. Instead, they use the so-called painless way to go about this by allowing deficit budgets. This means not only the politicians must educate themselves on the issues, but their constituents as well.

He adds that the argument that the federal government should live like we do, within our means, is hypocritical. The personal debt of Americans is close to $2 trillion, so effectively we all live in debt. The federal government just is behaving like we do. Moreover, it has the responsibility for the common welfare and general defense, as the Constitution requires. Yet state governments, 48 of which require a balanced budget by law, are favorably compared to the federal government. But state governments differ in their budgeting compared to the fed. The federal government has only one budget, but each state has two, a current account and a capital account. Only the state’s current account—effectively its day to day running costs—must be balanced. The capital account is the place for major project expenditures, and they have to be carried forward annually.

The federal government borrows money through Article I of the US Constitution, and had it not been able to, it could not have borrowed $15 million from Britain in 1803 to complete the Louisiana Purchase. It doubled the size of the country, made it possible for it to be united coast to coast, and without it, it perhaps would never have become the world power it is. Now the national debt is $14 trillion, but it is not owed to the British. The Chinese have around $3 trillion of it.

People who want a balanced budget, many of them Republicans, have to realize that it will need taxes to be raised. Cutting expenditures will not be enough, and will shut down the country first. But Republicans will not condone tax hikes because the people with the money are leading Republican donors. So, cooperation between the parties has been lacking, only quarreling, a lot of posturing and little dialogue. The deadline for increasing the debt ceiling is 2 August, with the country’s credit worthiness at stake. If the debt ceiling is not extended, the country will default, hitting the economy of the whole world, everything now being so interconnected.

The country’s credit worthiness underpins the financing of debts. Foreign countries must have confidence in the US economy or they will not be willing to lend. Of course, credit ratings agencies such as Moody’s and Standard & Poor’s can evaluate the soundness of the US economy but the ratings agencies were giving excellent ratings to the financial sector “before it went belly-up”, Tummala wryly concluded!

How Does Mixing Business with Politics Differ from Corruption and Bribery?

Most people would disapprove of corruption. It is one of those things people think are bad. Yet few of these same people realize that politically connected firms get massive benefits from their sponsoring of favored candidates in elections, once their favorites get into government. The bailouts of the banks deemed “too big to fail” are the latest and most obvious example.

A study by Russell Crook and David Woehr of the University of Tennessee, Knoxville, found that when firms engage in corporate political activities, such as lobbying and making campaign contributions, they get roughly 20 percent higher profits. So, to fatten your company’s profits, donate to a political campaign!

The analysis of 7,000 firms over various time periods, showed what led them into corporate political activity. The larger the firm, the more likely it was to be politically active, and politicians closer to power, more able to influence policy and legislation, were more likely to receive corporate donations. Incumbents more often got money than new candidates.

Yet in January 2010, the US Supreme Court in Citizens United v Federal Election Commission overturned an old ruling limiting corporate donations to politicians. It gave the nod to higher levels of corporate political influence. Consequently, corporate political donations will be subject to less scrutiny and transparency, and it will be all the harder to know who is sponsoring whom, and to what amount. Crook said:

Given this, we think that the Supreme Court ruling means that corporations and politicians will develop closer relationships than ever before.

In fact, corporations have already donated more money to politicians in the recent elections than ever before, despite the parlous state of the US economy. It reflects the money that big political donors seem to find quite readily to support supposedly grass roots Tea Parties, despite the country allegedly being on its uppers. Plainly the rich donors are not on their uppers.

Why then do corporate political donations lead to fatter profit margins? The corporate bosses do not like throwing money away to no purpose, so political corporate spending has a purpose, obviously. It is to get favorable legislation enacted. The donations are actually bribes! Besides the bank bailouts, another example was the “Copyright Term Extension Act”, sarcastically called, the “Mickey Mouse Protection Act”, in which Disney successfully lobbied to extend US copyrights by 20 years.

Though Crook and Woehr are careful not to say these practices are corrupt, they plainly think they are a cause for concern to citizens. Sticking with the market model, Crook said:

We do not believe that this activity is illegal, but this activity constrains natural market forces and is thus undesirable. And with the new Supreme Court ruling, it is only going to get worse.

The journal, Financial Management, has also revealed that corruption is widespread in the corporate world, and has confirmed successful corporations are often the ones with the most extensive political connections.

Mara Faccio studied several thousand firms and found:

Politically connected firms have higher leverage in the form of preferential loans, pay lower taxes, have regulatory protection, are made eligible for government aid, and have stronger market power. They differ more dramatically from their peers when their political links are stronger, and in more corrupt countries, although these characteristics can be observed worldwide.

She alleges that connected firms appear to enjoy substantial favors from governments, distorting the allocation of public resources. “Firms with no political ties appear to be at a disadvantage”, so, it seems, the pressure is on for all firms to corrupt government! Her study was not restricted to the USA. She looked at 47 countries all together, but political influence by companies was common in both emerging and developed countries, although the methods of political influence varied somewhat.

These studies show that the ordinary voter is oblivious to the way that democracy is commonly swindled by political bribery and corruption, in the USA and in most other capitalist countries, whether advanced or developing. People consider corruption as wrong, but show no curiosity that it is happening daily, and the one who suffers in the end is Joe and Jane Doe, the common man and woman, you and me.

It is time this corrupt system was ended, and it is certain that right wingers dressing up as Captain America and in tricorn hats—led by the nose by private sponsors from among the rich—will not do it. A genuine grass roots movement is needed, and it will probably be led, as it is in France and latterly in Britain, by serious students and angry unemployed young people.